Fiscal reform: short-term pain for long-term (and short-term) gain

Free Malaysia Today

7 hours ago

The Madani economic framework has set ambitious goals for fiscal stability and an improved revenue-to-GDP ratio. As I had recommended from the start this process is following three main stages.
The first involves cutting wastage, leakages and corruption with subsidy rationalisation at its core.
So far savings have been made of RM4 billion from electricity tariff reform, RM7.5 billion from diesel rationalisation and around RM1.5 billion from other areas. To this RM13 billion we expect to see at least RM8 billion from RON95 rationalisation.
This RM21 billion is a structural saving which will continue each year and is equivalent to 6.3% of current operational expenditure or 23.6% of development expenditure.
The second stage of fiscal reform involves assessing tax options and making modest well-scheduled adjustments rather than large and disruptive quick fixes.
So far relatively minor tax changes have been introduced, mostly targeted at the rich, including the high-value goods tax (HVG), the digital goods tax (DGT), the capital gains tax (CGT) and the low-value goods tax (LVG). These could raise around RM2.5 billion.
The biggest changes have been in the sales and services tax (SST) which raised RM5.5 billion last year and from next month will raise RM5 billion for the rest of this year and RM10 billion annually thereafter.
Added to the subsidy savings, these structural tax changes are equivalent to 10.1% of current operational expenditure or 38.2% of the 2025 development expenditure budget.
The final stage of fiscal reform, which we are about to enter, is to restructure the system for the long-term particularly to diversify the revenue base for greater stability, predictability and efficiency.
This means setting a new revenue model to reduce dependency on volatile revenue sources and Malaysia's historical reliance on commodity-based revenues from Petronas which may last for only the next 15 years.
A broader and more resilient tax and revenue base helps to insulate the economy from global volatility and commodity price fluctuations by focusing on more stable and predictable domestic revenue sources which rise as the economy grows and so maintains the revenue-to-GDP ratio organically.
Despite these modest and well-scheduled changes, there has been the usual chorus of outrage, especially from business groups who would scream in pain if hit by a falling feather.
The truth is that the short-term pain of adjustment costs and minor price rises have mostly already ended and the majority of people did not even notice it.
It is not surprising that businesses support the reintroduction of the goods and services tax (GST) because they mostly do not pay it, they reclaim it after passing on price increases to consumers. The discussion of the reintroduction of GST is unhelpful, especially because it has been ruled out for now.
In considering options for new or expanded taxes the government must take a fresh approach that reflects changes in the economy, such as the emerging gig-economy and the expanding e-payments and e-ecommerce industry.
A feasible alternative is the e-payments tax (EPT) which is a very broad-based, tiny tax with an efficient and effective mechanism to raise significant revenue without too much economic distortion or burden on businesses and consumers.
A simple 3% e-payments tax would raise RM43 billion, almost enough to replace SST all together.
The benefits of a robust fiscal position are many. Raising revenue and controlling spending reduces the need for government borrowing and the financing costs of that which at almost RM50 billion a year are the third largest demand on government spending.
Better revenue and reducing wastage, leakages and corruption also provides savings and income that can boost other priorities such as health, education and social protection including income support and retirement pensions.
These are not only 'long-term' gains, we are already seeing the possible benefits of the subsidy rationalisation and tax reforms so far worth at least RM34 billion.
For example, the budget for cash aid for schemes such as the Sumbangan Tunai Rumah (STR) and Sumbangan Asas Rahmah (Sara) was increased by 30% to RM13 billion in Budget 2025 and almost nine million people benefit from cash transfers through STR. Sara recipients have increased from 700,000 to 5.4 million, each eligible for monthly payments through MyKad.
Public healthcare spending rose to RM45.3 billion in Budget 2025, a 9.8% increase compared to the previous year. Education spending hit record levels rising 9.2% in Budget 2025 and even higher education benefitted by an extra 10.4%.
These changes directly improve the quality of life for everyone, enhance human capital development and increase productivity for businesses.
In the next stages, strategies to cushion the impact of economic change on vulnerable groups become more affordable. These include targeted cash transfers, a universal basic income, a basic pension in retirement, accessible public transport, reducing out-of-pocket expenses for healthcare and investment in the care economy as the population ages.
In fact, almost all of the promises of the last election manifestos become possible before the next general election holds the government to account.
Increasing revenue must also be accompanied by responsible spending and anti-corruption measures to ensure public trust.
A Government Procurement Act and a change in the mindset of policy design to end 'patronage cascades' that channel money to vested interests would both help ease concerns about higher taxes and lower subsidies.
Above all, fiscal reforms should continue to be implemented thoughtfully, and to garner public support the government must improve its communication strategy to link fiscal reforms definitively to the social benefits we are already seeing and which are promised for the long-term.
The views expressed are those of the writer and do not necessarily reflect those of FMT.